A recent court of appeals decision drives home the importance of including non-binding language in letters of intent. Based on a one page, nine paragraph, 205 word document, labeled “Final Proposal,” the court of appeals in First National Mortgage Company v. Federal Realty Investment Trust, 631 F.3d 1058 (9th Cir. 2011), found an enforceable contract—resulting in a multi-million dollar damage award. The court reached this conclusion even though the instrument provided that the “terms are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement” and the duration of the contemplated lease was not expressly set forth in the Final Proposal.

The details of this case are instructive. The developer, Federal Realty Investment Trust, is a publicly-traded real estate investment trust, which, beginning in the late 1990’s, sought to purchase or enter into a ground lease for the San Jose property in connection with its efforts to develop a mixed-use project known as Santana Row. To that end, the developer and First National Mortgage Company engaged in protracted negotiations over the course of several years. The parties exchanged various proposals including a “Counter Proposal”, a “Revised Proposal”, and a “Final Proposal”.

Instead of providing that it was non-binding, the instrument provided that the “terms are hereby accepted by the parties . . ..” The court minimized the latter part of that sentence, which provided that this so-called acceptance was “subject only to approval of the terms and conditions of a formal agreement.” The consequences were significant for this highly complex, multi-million dollar real estate transaction, with the court awarding damages of $15.9 million to First National for lost rent and for the loss of a “put” option under the Final Proposal.